Wild swings in the price of silver create even wilder swings in the price of silver securities. But the assets underlying these stocks remain unchanged. These swings make it even more difficult for a regular investor to determine which issues are overpriced, and which are sitting on mountains of uncapitalized equity or unliquidated assets. Let's look at four silver stocks that offer the best risk-reward ratios. While other silver stocks can be profitable for investors, these names offer the lowest risk given their reasonable valuations:
- Hecla Mining Company (NYSE:HL): Trading today around $6 and with nearly 2 billion in shares outstanding and an industry-consistent earnings per share of $.40, HL remains a significant player in the silver industry. So why has its stock price risen so dramatically? Much of this is due to the fact that its profit potential is tied directly to the price of silver, causing other industry players such as SSRI and EXK to rise more than 6% for the day. It is this connection to commodity prices that gives HL such a high beta coefficient of 2.12, meaning that it is more than twice as volatile as an average stock on the NYSE - and an average of half again as volatile as any other silver stock on any major market. While its low comparatively low price to earnings ratio of 16.86 shows it to be a more stable investment than Coeur d'Alene Mines Corp (NYSE:CDE) or Alexco Resource (NYSEMKT:AXU) with their price to earnings ratios of 36.43 and 135.44 respectively, a value investor would do well to wait until the price of silver has had a particularly bad day, leading to an advantageous drop in the price of this issue.
- Mag Silver Corp (NYSEMKT:MVG): With over $500 million in shares outstanding, it's surprising to learn that this silver-exploration giant has the lowest earnings per share in the industry of -.17. Only one of its peers also has a negative earnings per share: Silver Bull Resources Group (NYSEMKT:SVBL), with -.09. Yet SVBL has only sixty million dollars in shares outstanding, making it a microcapitalized company to which very different rules apply. Industry leader SSRI shows a blue-chip 6.28 and has more than a billion dollars in public assets. So why would an investor prefer MVG? The answer is in its liquidation value. Its incredibly low return on average equity of -13.58 and return on average assets of -13.33 might lead a careless investor to conclude that the company was unprofitable, and therefore not worth investing in. But a value investor in the Buffett mold will know that an unprofitable company can still have significant assets. In this case, MVG's holdings of silver and real estate both suggest its stock price will remain high until it is bought out. It is a risk to wait for a company to be absorbed by another, but in this market climate of consolation and acquisition, it is a risk which could have exceptional rewards to even a small investor.
- Pan American Silver Corp (NASDAQ:PAAS): Trading around $24 per share, this $3 billion mining-sector staple is not in as strong a position as it first appears. Its seemingly robust share price is only two points higher than its 52-week low and more than twenty points off its 52-week high. Three years ago shares of PAAS were trading above $43 per share, where soon thereafter prices collapsed to just over $10. The offering of a $.025 divided has not caused investors to flock to this issue. Yet why are they not more interested? Its price to earnings ratio of 11.34 is among the lowest in the sector, and is indeed respectable for any issue of this size. Its dividend yield of .33 is not inconsiderable, especially when most dividend-paying securities in the silver sector are not to be found on the stock market. Its earnings per share has been consistently over two points for the last year, and its single-point return on average assets, though low, is far preferable to the negative values of competitors like Coeur d'Alene Mines (CDE), MVG and Endeavour Silver (NYSE:EXK). While not yet a blue chip, this issue has the potential to gain a great deal of ground while still kicking out a regular dividend. Value investors would be wise to buy in while the potential for profit remains enormous.
- Silver Wheaton Corp (NYSE:SLW): With a market capitalization in excess of $12 billion, SLW remains one of the blue chips of the silver industry. Its interday trading increase of 3.34% represents nearly five hundred million dollars of created wealth. Its earnings per share of 1.32 is no comparison to Barrick Gold (NYSE:ABX) or SSRI at 6.28, but neither are direct competitors for its market share; its return on average assets of 6.30 is modest but stable, being nowhere near SSRI's 34.20 but also a far sight above EXK's -14.16. In more than five years of public trading SLW has shown nearly uninterrupted growth, so that it now sits at more than 1000% of its initial trading price. Its offer of a $.03 dividend has remained uninterrupted since it began earlier this year. The current low price of this issue reflects the recent introduction of a dividend program coupled with the wild swings of silver prices on commodity markets. What now looks like a safe, perhaps even boring investment choice will reward those investors who prize stable fundamental strength over flash and risk.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.